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Deflating inflation

Column box-Eagle Watch

The Ateneo Center for Economic Research and Development conducted a briefing on August 25, 2022 dubbed “Moving On and Moving Up: Bold New Directions for the Philippine Economy.” There were three presentations in that briefing, and this opinion article summarizes the first presentation delivered by Dr. Alvin P. Ang. His presentation focused on the issue of inflation.

For starters, it is worth mentioning that the Philippine economy is growing in line with expectations. The Asean+3 Macroeconomic Research Office estimates Philippine GDP growth at 6.5 percent in 2022 and 2023. The country needs to grow by 4.5 percent in 2022 to get back to its 2019 GDP level. Sectorally, it is only the electricity, gas, and water sector that has already managed to exceed its pre-pandemic level; however, a welcome development is that consumer expectations have almost gone back to pre-pandemic levels.

Interestingly, most of the high inflationary episodes in the Philippines can be traced to external forces that affect the supply side. Historically, since 1971, the country experienced four oil crises brought about by disturbances and wars in the Middle East, two financial crises (the 1997 Asian Financial Crisis and the 2007 Global Financial Crisis), and the ongoing global health crisis. From all these, inflation in the Philippine economy spiked.

Commodity imports that are components of food and transport have greatly contributed to inflation. In 2020, for instance, four Asean members (Philippines, Indonesia, Malaysia, and Vietnam) exhibited inflationary pressures for the food and beverages sector and the transport and communications sector. By the end of 2021 and during the early part of 2022, inflation in the transport and communications sector was at its highest for all countries.

The inflationary effect of the delayed and suspended trade and economic activities due to Covid-19 has been compounded by the situation in Ukraine and Russia. The supplies of wheat from Ukraine and oil from Russia, both vital imported inputs by the Philippines and the rest of the world, have been difficult to access due to the war. In the Philippines, food imports account for 12 percent of imported goods, while oil imports account for 17 percent.

It appears that global oil prices influence the prices of other commodities. Roughly, it is estimated that a one-percent increase in the price per barrel of oil leads to an increase of about 11 basis points in the overall inflation rate, an increase of about 11 basis points in food inflation rate, an increase of about 10 basis points in utilities inflation rate, and an increase of about 16 basis points in transport inflation rate.

High inflation in the United States is largely driven by supply-side bottlenecks due to pandemic restrictions. There were three rounds of Fed stimulus at the end of 2021 that resulted in higher consumer demand. When the US began to open up and ease restrictions, demand for dining, travel, and entertainment increased at a rate that was difficult for the supply side to match. Inflation in the United States may result in an increase in interest rate, and narrowing interest rate differentials could drive further peso depreciation. Such depreciation could, in turn, feed into a cycle of higher prices.

Globally, short-term challenges are largely dictated by international prices. Inflation may remain elevated as the Ukraine-Russia conflict threatens fertilizer and wheat production. The onset of the cold season could potentially increase the price of oil due to higher demand for heating. Interest rates in Western economies will likely be pressured to go up to tame demand-side pull. There is also a tendency for local currencies to depreciate, and this could lead to more expensive travel and import prices.

Locally, food and oil prices will likely remain elevated and push the inflation rate up to double the government target. Importation of food cannot be overruled if no sufficient local production is available. For instance, in terms of volume of production of common agricultural products, a significant number of crops have had the same level of output for the past 15 years. Only eggplant, red onion, and papaya have shown improvements. Thus, it might be good to have a transparent inventory of all food production in the country to know which provinces have surpluses or shortages in certain crops, and then consider inter-provincial selling.

Moreover, the completion of the national ID distribution within the year and the integration of all government databases into the national ID system could facilitate the targeting and distribution of social protection among vulnerable groups. Perhaps, now would be a good opportunity to rethink competitive land use for food security.

Dr. Ser Percival K. Peña-Reyes is the Director of the Ateneo Center for Economic Research and Development. His coauthor, Ms. Priscile Minde Y. Bahjin, is a graduate student at the Department of Economics of Ateneo de Manila University.

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